Gold, Silver Forecast: Real Rates, Weak USD May Underpin XAU, XAG

Gold, Silver, US Real Rates, Inflation Expectations, US Dollar – Talking Points:

• Climbing inflation expectations, falling real rates of return, and a weaker USD may bolster precious metal prices.
• Gold prices approaching key inflection point at the 200-MA.
• Silver prices continuing to track the uptrend extending from the March 2020 nadir. Are further gains in the offing?

As mentioned in previous reports, the combination of climbing inflation expectations, falling real rates, and a weaker US Dollar may provide a tailwind for gold and silver prices in the coming months. The impending delivery of a substantial fiscal support package will likely limit the Greenback’s potential upside and in turn pave the way for precious metals to recover lost ground.

Democrats in both the House and Senate filed joint budget resolutions that will allow President Biden to pass the majority of his proposed $1.9 trillion stimulus package with a simple majority – in a process called reconciliation.

Coronavirus cases have also markedly declined since peaking on January 8 at 308,000, which could allow the economy to return to a level of normalcy in Q2 of 2020.

Data Source – Bloomberg

The provision of additional fiscal support, and the expectation that a sooner-than-expected reopening will allow the release of pent-up demand, could see inflation expectations extend their recent push higher.

However, the Federal Reserve’s commitment to continue purchasing at least $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities “until substantial progress has been made toward the Committee’s maximum employment and price stability goals”, will likely keep the lid on real rates of return for the foreseeable future.

With that in mind, gold and silver prices may trudge higher in the coming weeks on the back of fiscal aid progress, the Federal Reserve’s dovish stance and climbing expectations for consumer price growth.

Gold Price Daily Chart – Probing Sentiment-Defining 200-MA

Gold futures daily chart created using Tradingview

Gold prices have continued to slide lower over the last 6 months, as prices remain confined within a Descending Channel formation.

However, with price remaining constructively perched above the 50% Fibonacci retracement of the move from the March 2020 nadir to the August high, the long-term outlook seems skewed to the topside.

Nevertheless, with price struggling to breach the sentiment-defining 200-day moving average (1856) and both the RSI and MACD tracking below their respective neutral midpoints, further losses are certainly not out of the question.

That being said, gold could extend its recent rebound higher if range support at 1820 – 1830 successfully stifles selling pressure. A daily close above the 55-EMA (1858) likely required to carve a path for price to challenge channel resistance and the December 2020 high (1912).

Alternatively a daily close below 1820 could signal the resumption of the secondary downtrend and clear a path for sellers to drive bullion back towards the 88.6% Fibonacci (1789).

The IG Client Sentiment Report shows 82.70% of traders are net-long with the ratio of traders long to short at 4.78 to 1. The number of traders net-long is 0.71% lower than yesterday and 10.47% lower from last week, while the number of traders net-short is 4.94% lower than yesterday and 18.61% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Gold prices may continue to fall.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Gold trading bias.

Silver Price Daily Chart – Tracking 11-Month Uptrend

Silver price daily chart created using Tradingview

Silver appears poised to extend its climb higher, as prices track firmly above all three moving averages and continue to respect the uptrend extending from the March 2020 lows.

With the RSI perched above its neutral midpoint, and the slope of the 55-EMA notably steepening, the path of least resistance seems higher.

If former resistance-turned-support at the January 21 high (26.04) stays intact, a push to challenge range resistance at 28.75 – 29.10 seems likely. A daily close above that is required to signal the resumption of the primary uptrend and bring the psychologically imposing 31.00 mark into focus.

However, slicing below 26.00 could intensify near-term selling pressure and generate a pullback to the January low (24.06).

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss